Do they have an alternative?

More and more commentators are arguing that unless the government acts soon, the British recession will turn into a slump. They are wrong. Britain is already in a slump. The recession will end at some point and the economy will stop contracting, but there is no scope for a sustainable recovery. The British economy is likely to be bumping along at the bottom for some time to come.

Shrivelled bits

The fact that more experts are talking about a slump is, however, significant. It reflects the recent mood-change over Britain's economic prospects. A few months ago, politicians, economists and journalists believed their own predictions of a recovery. Now very few of them believe anything of the sort. The Sunday Times, for example, has abandoned its 'green shoots of economic recovery' column, probably reckoning that a 'brown shrivelled dead bits' column would better reveal the real state of the economy.

After almost 18 months of recession, it has started to dawn on them that this is no ordinary cyclical slowdown. Expectations are down, pessimism is up. The failure of the predicted post-general election recovery to get beyond anecdotes of the 'there were more people looking around my showroom' variety has been the last straw for many. Now economists talk of things not improving much until 1993, and some say not until the second half of the nineties.

Low expectations

When the heads of the Group of Seven top capitalist nations met in Munich in July for their annual economic summit it only made perceptions worse. So low were their expectations that they arrived at this economic summit willing to talk about anything except the world economy. Our always-on-the-ball John Major got himself scolded by the rest when he made the mistake of trying to raise trade policies and the lack of movement in the Gatt talks.

Some of the Western leaders openly asked whether there was any point getting together for such non-events in the future. After all, getting together in such high-profile fashion to do nothing only serves to highlight the seriousness of the crisis. Anybody watching the summit could well conclude that, if all of the world's leading economies are experiencing slow or nil growth and yet there are no solutions on offer, what hope is there for the smaller industrialised countries, never mind the second and third worlds?

But what?

In this mood of doom and gloom comparisons with the Depression of the 1930s are becoming more common. William Rees-Mogg, former editor of the Times and co-writer of the sombre The Great Reckoning, has drawn parallels between the Munich economic summit and the impotence of world leaders in the thirties, and warned the British government of the dangerous social and political implications of another Depression (Independent, 13 July 1992).

The mood of pessimism about Lamont's fabled recovery is breeding desperate calls for government action. The 'there is no alternative', 'steady as she goes', 'be patient', 'do nothing' approach from the Tory frontbench has been attacked from all sides. Tory back benchers, Labour front benchers, right-wing monetarists and liberal Keynesians all say something must be done. But what?

What's a £?

The most popular demand is for the government to stop propping up the pound within the European Exchange Rate Mechanism (ERM) and so cut interest rates. Devaluation of the pound (or as they say in polite company, realignment downwards) is now backed by Neil Kinnock and Baroness Thatcher, leftish Keynesian economists like Cambridge's Wynne Godley, free market monetarists like City economist Tim Congdon and Sir Alan Walters, as well as the new CBI chief, the chairmen of ICI and Tate & Lyle, and the chief executive of Midland Bank.

The significant thing here is not the diverse range of people backing devaluation, but how quickly the general mood has changed. Five months ago, at the time of the election, devaluation was a very dirty word in establishment circles and its proponents were regarded as little better than traitors. The sudden about turn is a sign of how desperate they have become about the economy.

Up the creek

So why is the government so intransigent in the face of these calls for action? It is doubtful that the cabinet itself remains confident of an early recovery. The increasingly tetchy performance of the chancellor in dismissing his critics as 'ridiculous', 'alarmist' and 'up the creek' belies the government's own fears. But even if Major were to admit that he did not believe in the fantasy world he has painted, of Britain and sterling replacing Germany and the mark as the economic centre of Europe, it would make little difference. There is nothing he can do to turn things around.

In its defensive reaction to criticism, the government betrays the recognition that it has little scope to make a difference to the economy. The Tories are acting out the brilliant discovery which the economics professionals made in recent years (before their current fit of panic): that government intervention in the economy can no longer galvanise capitalism. The old levers of fiscal and monetary policy just do not work any more.

No more kick-starts

Before their fear got the better of them in the past few months, the same message had been coming through in economic think-tank reports, in bank and investment house surveys, and in the financial and business press. Each time, it has been introduced as a new discovery - 'it's now realised that' or 'contrary to the conventional view' - but the message is the same: government action cannot have a dynamic economic effect.

Whatever governments do - lower interest rates, raise them, spend more, spend less - economies just seem to bump along at the bottom unaffected. As Major accurately said in July of the American experience of 18 cuts in short-term interest rates, 'it has not produced the kick-start to the economy that many anticipated'. Faced with the fact that it cannot kick-start the economy, the British treasury team has tried to make a virtue out of their impotence by arguing that they're not going to be pushed into deviating from their long-term strategy of...doing nothing.

Norman Tebbit, in adding his voice to the 'cut interest rates' chorus, dubbed Lamont the 'no-club' chancellor, in contrast to 'one-club' chancellor Lawson who relied only on interest rate changes during the late eighties. In replying on BBC Radio's World this Weekend, Lamont insisted that the government's was 'the only policy that could be pursued'. What this show of strength really amounts to is abandoning any pretence of managing the economy, and just drifting along with events.

Lamont's predictions of a rosy future are too absurd to waste time on. But the view that there's very little governments can do to positive effect is well founded. It corresponds to the real decay in the Western economies which marks this recession out as the start of a full-scale slump, not just in Britain but worldwide. After 20 years of cyclical crises since the first major postwar recession of 1973, capitalist economies are becoming more and more immune to government intervention. They are becoming too far gone to be revived by the old medicinal methods.

Excuses, excuses

Both the British government and its critics try to blame past policy errors for the current mess, whether it be making credit too easy in the eighties or joining the European Exchange Rate Mechanism in 1990. But these are all just attempts to find scapegoats for a moribund economic system.

The different policies which are now being blamed were only pragmatic responses to an earlier stage of the crisis. They are not the causes of the present economic difficulties. But the fact that they have failed to resolve things is testimony to the growing ineffectiveness of short-term techniques of crisis management. In so far as previous palliatives have worked at all, it is only at the expense of creating greater problems today. Yesterday's 'solutions' have become today's symptoms of a slump which is rooted, not in one or another policy, but in the inherently crisis-ridden character of the capitalist economy.

Out of control

The key capitalist survival mechanisms of the 1970s and 1980s - state intervention and credit expansion --are now relatively exhausted. The modern economy has become dependent on state support, whether administered through government contracts to the defence industry, pharmaceutical companies and building contractors, or through backhanders like selling nationalised assets to the private sector on the cheap and subsidising Canary Wharf. As a result, the capitalist economy has kept going longer than was justified by real levels of profitability. This is one reason why government budgets are now increasingly out of control.

Credit has been the other trick used to keep the wheels of the economy moving. Through borrowing it has been possible to extend production even when profitability has been poor. Hence the explosion first of third world debt, and then, during the 1980s, of government, corporate and personal debt in the West.

These measures of state spending and credit expansion are now widely blamed for creating debt-management problems. More importantly, however, they no longer operate as effective economic boosters. Look at how the limitations of effective state spending have been reached in Britain.

All spent

Back in the 1930s, state spending provided an extraordinary bonus to help stimulate the economy. Before the thirties, government spending was pretty insignificant, equivalent to about one tenth of the whole economy. When it doubled during that decade, it represented a substantial injection of aid for the other 90 per cent of the economy.

Today, by contrast, Britain goes into slump with an economy already largely based on state activity. Government expenditure represents well over 40 per cent of national output. Changing government spending by a couple of per cent of national output might make a big difference to the government borrowing requirement, but has far less positive impact on the smaller productive base of the economy which remains. British capitalism has become so dependent on state spending that it has become almost immune to this wonder-drug of an earlier time.

Worse still, the climate of international economic cooperation which facilitated the anti-crisis policies of the recent past is also exhausted. Over the past 20 years, the short-term stimulus provided by state spending and the international expansion of credit was only made possible by the high level of international capital flows among cooperating powers. As the Munich summit revealed, this system of cooperation is becoming far less durable and solid.

The tendency towards the breakdown of international economic cooperation results from the demise of the relatively stable political order of the Cold War. Economic factors are compounding the new tensions. Cooperation relied on the relative prosperity of the stronger economies of Japan and Germany. They provided the funds to help out the others, so stimulating the world economy and benefiting themselves. Today the synchronised world recession makes it more difficult for Japan and Germany to play this locomotive role. They will look to managing their own economies first, and hold back on making concessions to help others.

Crisis to slump

On the one hand, the stagnation of economic life stimulates economic conflict and rivalry - look at tensions over interest rate levels, over the world trade talks, over Japanese investment in the USA. And on the other, this weakening of the framework of international cooperation makes it more difficult to limit the scope of the recession. These two interacting processes exacerbate one another.

The greater barriers to crisis management by governments today explain why this recession has been transformed into a slump. Of course, it is always possible that the panicky Messrs Major and Lamont will buckle under the pressure and try to do something, anything, to improve matters. The strength of their resolve cannot be assumed; but the desperate state of their economy can. That makes it certain that the government's action or inaction in the sphere of economic policy will have negligible impact.

Although they can do nothing to pull the economy out of slump, the one sphere in which government policy could have an impact is the living standards of the working class. Recent discussions about cutting welfare benefits and freezing public sector pay indicate the sort of 'positive action' we can expect to see more of.

Reproduced from Living Marxism issue 47, September 1992

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